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Item 5 1

ERCOT Public

The Finance & Audit (F&A) Committee is expected to consider

F&A Committee Agenda Item 5:

Recommendation Regarding DAM Credit

Parameters

at its meeting on April 13, 2015.

The Board of Directors is expected to hear the

F&A Committee’s recommendation on this matter as part of the F&A Committee Report at

the Board meeting on April 14, 2015.

Attached are the Board and Committee materials inrelation to these agenda items.

1

Item 5: Recommendation regarding DAM

Credit Parameters

Mark Ruane

Director, Market Credit

Finance & Audit Committee Meeting

April 13, 2015

ERCOT Public

2

Item A

Protocol Section 4.4.10(6)(g)(ii), Credit Requirement for DAM Bids and

Offers, specifies:

DAM Credit Parameters

A TAC-recommended and ERCOT Board-approved procedure

(“Procedures for Setting Nodal Day-Ahead Market Credit

Requirement Parameters”), which will be reviewed at least

annually and posted on the MIS Public Area, will be used to

define and modify the values of “e1,” “e2,” and “e3.”

Item 5

ERCOT Public

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Item 5

ERCOT Public

Item B

Protocol Section 4.4.10(7), Credit Requirement for DAM Bids and

Offers, specifies:

The variables to define the pre-DAM credit validation process

referenced in item (6) above (including the standard setting for

the “e1,” “e2,” and “e3,” if any) shall be posted on the MIS

Public Area. TAC shall review these variables at least annually

and may recommend to the ERCOT Board, changes to these

values. If changes to these values are approved by the

ERCOT Board, such revised values shall be posted on the MIS

Public Area within three Business Days of ERCOT Board

approval.

4


Item 5

ERCOT Public

The values for these variables are set forth in the Other Binding Document

(OBD) “Procedures for Setting Nodal Day-Ahead Market Credit Requirement

Parameters.”

Please note that NPRR 671, “Incorporation of DAM Credit Parameters into

Protocols,” incorporates the OBD into Protocols. In addition, the NPRR

removes the requirement for annual review while adding change control

processes for the parameters consistent with other credit parameters.

5

Item C

Protocol Section 4.4.10(6)(d)(iv), Credit Requirement for DAM Bids

and Offers, specifies:


For qualified PTP Obligation bids, ERCOT shall reduce the

credit exposure in paragraph (6)(d)(i) above, by the product of

the bid price, if positive, and the quantity of the bid less than or

equal to the quantity of the total of all expiring CRRs at the

specified source and sink pair and delivery period, less all valid

previously submitted PTP Obligation bids at the specified

source and sink pair and delivery period multiplied by a factor

initially set at 90% and to be reviewed by TAC and approved

by the ERCOT Board at least annually.

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ERCOT Public

6 Item 5

ERCOT Public

The Board last approved these items at its June 10, 2014 meeting.

At its January 20, 2015 meeting CWG recommended that the DAM

credit parameters remain unchanged.

WMS voted in favor of the same recommendation at its February 4,

2015 meeting.

TAC voted in favor of the same recommendation at its February 26,

2015 meeting.


7

F&A Committee Recommendation to Board <Vote>

ERCOT staff requests that the F&A Committee vote to

recommend to the ERCOT Board, as recommended by TAC, that:

A. The procedure (“Procedures for Setting Nodal Day-Ahead Market

Credit Requirement Parameters”) remain unchanged;

B. The variables to define the pre-DAM credit validation process

remain unchanged; and

C. The discount factor applied to qualified PTP Option Bids remain

unchanged.

The Board will consider this matter at its April 14, 2015 meeting in

connection with the F&A Committee Report. For ease of reference,

TAC’s recommendation to the Board follows this presentation.

<VOTE>

Item 5

ERCOT Public

Item 8.2 1

ERCOT Public

Date: April 7, 2015

To: Board of Directors

From: Randa Stephenson, Technical Advisory Committee (TAC) Chair

Subject: Day-Ahead Market (DAM) Credit Parameters

Issue for the ERCOT Board of Directors

ERCOT Board of Directors Meeting Date: April 14, 2015

Agenda Item No.: 8.2

Issue: The Protocols require ERCOT Board review and approval of certain credit parameters:

Procedures for Setting Nodal Day-Ahead Market Credit Requirement Parameters;

Variables to Define the Pre-DAM Credit Validation Process; and

Point to Point (PTP) Obligation Bid Reduction Factor.

Background/History:

Procedures for Setting Nodal Day-Ahead Market Credit Requirement Parameters

As specified in Protocol Section 4.4.10, Credit Requirement for DAM Bids and Offers, the

ERCOT Board is required to annually review the Procedures for Setting Nodal Day-Ahead

Market Credit Requirement Parameters (Procedures). The ERCOT Board last considered the

Procedures at its June 10, 2014 meeting, and approved the procedures with no revisions.

On February 26, 2015, TAC unanimously voted to affirm the current document, Procedures for

Setting Nodal Day-Ahead Market Credit Requirement Parameters, as recommended by both the

Wholesale Market Subcommittee (WMS) and the Credit Work Group.

The current document is attached hereto as Attachment A.

Variables to Define the Pre-DAM Credit Validation Process

As specified in paragraph (7) of Protocol Section 4.4.10, the ERCOT Board is required to

annually review the variables to define the pre-DAM credit validation process as noted below:

The variables to define the pre-DAM credit validation process referenced in item

(6) above (including the standard setting for the “e1,” “e2,” and “e3,” if any)

shall be posted on the MIS Public Area. TAC shall review these variables at

least annually and may recommend to the ERCOT Board, changes to these

values. If changes to these values are approved by the ERCOT Board, such

revised values shall be posted on the MIS Public Area within three Business

Days of ERCOT Board approval.

The values for these variables are set forth in the Procedures. The ERCOT Board last

considered the variables to define the pre-DAM credit validation process at its June 10, 2014

meeting, and approved the variables with no changes.

Item 8.2 2

ERCOT Public

On February 26, 2015, TAC unanimously voted to recommend to the ERCOT Board

maintaining the values for the variables to define the pre-DAM credit validation process as

recommended by both the WMS and the Credit Work Group.

Point to Point (PTP) Obligation Bid Reduction Factor

As specified in paragraph (6)(d)(iv) of Protocol Section 4.4.10, the ERCOT Board is required to

annually review the PTP Obligation bid reduction factor as noted below:

For qualified PTP Obligation bids, ERCOT shall reduce the credit exposure in

paragraph (6)(d)(i) above, by the product of the bid price, if positive, and the

quantity of the bid less than or equal to the quantity of the total of all expiring

CRRs at the specified source and sink pair and delivery period, less all valid

previously submitted PTP Obligation bids at the specified source and sink pair

and delivery period multiplied by a factor initially set at 90% and to be reviewed

by TAC and approved by the ERCOT Board at least annually.

The ERCOT Board last considered the PTP Obligation bid reduction factor at its June 10, 2014

meeting and approved the factor with no changes.

On February 26, 2015 TAC unanimously voted to recommend to the ERCOT Board

maintaining the 90% PTP Obligation bid reduction factor as recommended by both the WMS

and the Credit Work Group.

Key Factors Influencing Issue:

Considering Credit Work Group, WMS and ERCOT staff input, TAC did the following:

Reviewed the Procedures for Setting Nodal Day-Ahead Market Credit Requirement

Parameters and voted to submit the above recommendation to the ERCOT Board or as

further defined in Attachment A;

Reviewed the current variables to define the pre-DAM credit validation process in

Protocol Section 4.4.10 and voted to recommend to the ERCOT Board maintaining the

existing values for the variables; and

Reviewed the current PTP Obligation bid reduction factor in Protocol Section 4.4.10 and

voted to recommend to the ERCOT Board maintaining the 90% PTP Obligation bid

reduction factor.

Conclusion/Recommendation:

As more specifically described above, TAC recommends that the ERCOT Board:

Reaffirm the current Procedures for Setting Nodal Day-Ahead Market Credit

Requirement Parameters as described in Attachment A;

Maintain the existing values for the variables to define the pre-DAM credit validation

process; and

Maintain the 90% PTP Obligation bid reduction factor.

Item 8.2 3

ERCOT Public

ELECTRIC RELIABILITY COUNCIL OF TEXAS, INC.

BOARD OF DIRECTORS RESOLUTION

WHEREAS, the following paragraphs of Protocol Section 4.4.10, Credit Requirement for DAM

Bids and Offers, require ERCOT Board review and approval of certain credit parameters:

Paragraph (6)(g)(ii) requires annual ERCOT Board review of the Procedures for Setting

Nodal Day-Ahead Market Credit Requirement Parameters;

Paragraph (7) requires annual ERCOT Board review of the variables to define the pre-

DAM credit validation process; and

Paragraph (6)(d)(iv) requires annual ERCOT Board review of the Point-to-Point (PTP)

Obligation bid reduction factor.

WHEREAS, the ERCOT Board deems it desirable and in ERCOT’s best interest to:

Reaffirm the current Procedures for Setting Nodal Day-Ahead Market Credit

Requirement Parameters, attached hereto as Attachment A;

Maintain the current values for the variables to define the pre-DAM credit validation

process; and

Maintain the 90% PTP Obligation bid reduction factor.

THEREFORE be it RESOLVED, that the ERCOT Board hereby approves the following:

The current Procedures for Setting Nodal Day-Ahead Market Credit Requirement

Parameters as specified in paragraph (6)(g)(ii) of Protocol Section 4.4.10;

The current values for the variables to define the pre-DAM credit validation process as

specified in paragraph (7) of Protocol Section 4.4.10; and

The current 90% PTP Obligation bid reduction factor as specified in paragraph (6)(d)(iv)

of Protocol Section 4.4.10.

Item 8.2 4

ERCOT Public

CORPORATE SECRETARY’S CERTIFICATE

I, Vickie G. Leady, Assistant Corporate Secretary of ERCOT, do hereby certify that, at its April

14, 2015 meeting, the ERCOT Board passed a motion approving the above Resolution by

______.

IN WITNESS WHEREOF, I have hereunto set my hand this ____ day of April, 2015.

______________________________

Vickie G. Leady

Assistant Corporate Secretary

Procedures for Setting Nodal Day Ahead Market (DAM) Credit

Requirement Parameters Attachment A

ERCOT Board Approved 06/10/14 1

Item 8.2

ERCOT Pulbic

Revisions and Approval Information ERCOT Board Approval Date: 6/10/14

Revision History:

Date Version Description Author

11/16/10 0.1 Initial document name- Day Ahead Market (DAM) Collateral

Parameters Process

7/19/11 0.2 Annual Review and Approval from the ERCOT Board. Revisions to

the title and General Procedure language.

Mark Ruane

7/17/12 0.3 Annual Review and Approval from the ERCOT Board (no changes) Mark Ruane






Item 8.2

ERCOT Pulbic

As required by Nodal Protocol Section 4.4.10, Credit Requirements for DAM Bids and Offers

General Procedure

ERCOT will evaluate and may adjust each Counter-Party's "e" factors at least once every two

weeks.

ERCOT may adjust "e" factors up or down based on ERCOT's judgment, so long as the reason is

documented, and the documentation is provided to the Counter-Party.

For purpose of clarity, “e” factors will be rounded to the hundredth decimal place.

ERCOT must re-examine "e" factors immediately if:

a. Counter-Party exceeds 90% of Available Credit Limit (ACL) available to Day-Ahead

Market (DAM).

b. Counter-Party’s Three Part Supply Offers (TPOs) “significantly” decrease, DAM

Energy Only Offers (EOOs) "significantly" increase or decrease and/or DAM Energy

Bids increase or decrease “suddenly”.

ERCOT may adjust DAM credit parameters up or down at ERCOT’s sole discretion with at least

two Bank Business Day’s Notice. ERCOT may loosen credit parameters with less Notice, if

needed.

The default value of parameters for every Counter-Party are:

e1 = 95th percentile of Ratio1 over the last 30 days

where Ratio1 is a daily calculation as follows:

Ratio1 = Min[1, Max[0, (∑h=1,24 (Qcleared-Bids*PDAM - Qcleared-TPO*PDAM - Qcleared-EOO*PDAM)/

(∑ h=1,24 Qcleared-Bids*PDAM)]]

except Ratio1 = 1 when ∑ h=1,24 Qcleared-Bids*PDAM = 0

e2 = 0, e3 = 1, d = 85, a = 50, b = 45, y = 45, z = 50, u = 90, t = 50




Item 8.2

ERCOT Pulbic

Counter-Party may request ERCOT for more favorable parameters by agreeing to all the

conditions below:

1. Notify ERCOT of expected changes due to change in activity, and the likely duration of

such changes, to the following values as soon as practicable after being estimated by the

Counter-Party and at least two Business Days in advance of when such changes become

effective:

a. If Ratio1 is likely to be greater than the Counter-Party's currently assigned value

of e1for particular day(s), then the estimated daily values of Ratio1 specifying the

day(s) along with the daily DAM Energy Bid, EOO, and TPO quantity

assumptions used to arrive at those values; and

b. If Ratio is likely to be lower than the Counter-Party's currently assigned value of

e2 for particular day(s), then the estimated daily values of Ratio2 specifying the

day(s) along with the daily DAM Energy Bid, EOO, and TPO quantity

assumption used to arrive at those values

2. ERCOT, in its sole discretion, will determine the adequacy of the disclosures made in 1

above and may require additional information as needed in evaluating whether a Counter-

Party is eligible for favorable treatment.

3. ERCOT may change the triggers for providing information (as described in 1 above) to

ensure reasonable levels of information are obtained.

4. ERCOT may, but is not required, to use information provided to re-evaluate "e" factors

and may take other information into consideration as needed. Under routine procedure,

ERCOT may change any "e" factor with at least two Bank Business Day's Notice.

However, ERCOT may adjust any "e" factor immediately if, in its sole discretion,

ERCOT determines that the "e" factor(s) set for a Counter-Party do not adequately match

the financial risk created by that Counter-Party's activities in the market.

5. If ERCOT determines that information provided to ERCOT is erroneous or that ERCOT

has not been notified of required changes, ERCOT may set all parameters for the

Counter-Party to the default values with a possible adder on the "e1" variable, at

ERCOT's sole discretion, for a period of not less than seven days and until ERCOT is

satisfied that the Counter-Party is complying with the rules for more favorable treatment.

In no case shall the adder result in an e1 value greater than one.

If an Entity meets the requirements above for more favorable treatment, then the

parameters for that Counter-Party are:




Item 8.2

ERCOT Pulbic



Ratio1 = Min[1, Max[0, (∑h=1,24 (Qcleared-Bids*PDAM - Qcleared-TPO*PDAM - Qcleared-EOO*PDAM)/

(∑ h=1,24 Qcleared-Bids*PDAM)]]

except Ratio1 = 1 when ∑ h=1,24 Qcleared-Bids*PDAM = 0

ERCOT may adjust the value of e1 by changing the quantity of bids or offers to the values

reported by the Counter-Party in Condition 1 above or based on information available to

ERCOT.



Ratio2 = 1 - Max[0, (∑h=1,24 (Qcleared-EOO + Qcleared-TPO - Qcleared-Bids)/

(∑ h=1,24 (Qcleared-EOO + Qcleared-TPO))]

except Ratio2 = 0 when ∑ h=1,24 (Qcleared-EOO + Qcleared-TPO) = 0

ERCOT may adjust the value of e2 by changing the quantity of bids or offers to the values

reported by the Counter-Party in Condition 1 above or based on information available to

ERCOT.

e3 = 1

d = 85, a = 50, b = 45, y = 45, z = 50, u = 90, t = 50

FOR NEW COUNTER-PARTY THAT STARTS AFTER NODAL GO-LIVE

From entry until the second biweekly reset

e1 = 1, e2 = 0, e3 = 1 (all percentiles are the same as those in effect for the entire market)

“e” factors will be set in accordance with the normal procedure beginning with the second

biweekly reset.

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